Help "translating" a waterfall exercise (toughest I came across)
Hi everyone,
Currently working on a waterfall exercise with 6 tiers but a bit lost regarding a mention for tiers 1/2/3 and globally for tiers 4/5/6.
LPs EQ = 100%
Manager = 0%
CF are given:
Contrib total = -496m
Distrib Total = 1,04bn
Net = 545m
IRR = 17.61%
(8 years approx.)
Distributions exact indications:
Tier 1 - 0.0% to the Manager and 100.0% to the Limited Partners until Limited Partners have received a 9.0% internal rate of return on their invested capital, net of distributions received as of such period
Tier 2 - 15.0% to the Manager and 85.0% to the Limited Partners until the Limited Partners have received a 14.0% internal rate of return on their invested capital, net of distributions received as of such period;
Tier 3 - 50.0% to the Manager and 50.0% to the Limited Partners until the Manager has received an amount equal to 15% of the fund level net profit through such period (as determined on a cash flow basis);
Tier 4 -15.0% to the Manager and 85.0% to the Limited Partners until the Limited Partners have received a 1.80x equity multiple on total Limited Partner invested capital to date;
Tier 5 - 100.0% to the Manager and 0.0% to the Limited Partners until the Manager has received an amount equal to 20.0% of the fund level net profit through such period (as determined on a cash flow basis), and thereafter;
Tier 6 - 20.0% to the general partner and 80.0% to the capital contributing partners.
1/2/3:
"net of distributions received as of such period"
Can I just work-out my waterfall calcs. as usual or is this another mechanism (deducting anything?)
Tier 4: Should I assume that we've reached Tier 3 and that 17.61% - 15% remains
That based on this I'm not applying a EM hurdle rather than an IRR hurdle?
Tier 5: After that EM Hurdle I give everything (THAT REMAINS) to the GP until he reaches a 20% IRR?
Tier 6: Split 80/20 on what's left?
Any help would be more than welcomed !!
Who in their right mind would ever agree to something this ridiculous lol, so unnecessarily overly convoluted... If I saw this in the real world I would run.
To your questions:
1. I have no idea what they're trying to say with regards to "net of distributions as of such period", seems like superfluous language. I would model as normal. If it said "in such period" it would imply the GP doesn't start to collect a promote until the following period and anything in excess of the hurdle would go to the LP in that period, but that is not what it says and I've never seen something like that anyways.
2. You wouldn't assume anything here, you would just model the waterfall as it is laid out. In a shorter term deal its probably going to get skipped when you're already over a 14% IRR, but in a longer term hold it will come into play to get the LP to 1.8x.
3. No, everything that remains until the GP reaches 20% of total profits distributed, similar to your Tier 3 catch-up to 15%. Remember this is PROFITS, not total distributions.
6. Yes.
Thanks a lot for your return !! I've got 36 hours to work on this.
Never came across such a brutal modeling test.
Real broker's brochure for a London building with a potential for Redev, need to provide recommendations (not a single assumption is given from the firm):
Demolish + Hotel
Refurb for mixed-use
Demolish for Resi
Demolish for Office
Demolish for high-end Resi
5 analysis to be done
+ Waterfall exercise
At the moment I'm here:
Tier 1 ok
Tier 2 ok
Tier 3: I'm stopping playing around IRR here I'm doing a catch-up base on profit not IRR as the GP did not provide any capital
Tier 4: Actually fighting with an EM hurdle... Let's see
Tier 5: Another Catch-up
Tier 6: Easy
???
Thanks again! Really appreciated!
God that's some 1944 Normandy exercise, more than happy to get your thoughts:
Tier 1 (IRR check 9% & No GP Distrib)
Tier 2 ( IRR check 14% & GP is getting its first distrib (85% / 15%)
Tier 3 :
GP "must" catch-up with 15% of total profit (known: 545m)
Until then 50/50 split
15% of 545 = 82m
GP already got 31m
GP needs 82-31=51m to catch-up
In this tier as it is 50/50 split until we reach 51m LP adds 51m to its account
Tier 4:
15% GP & 85% LP until LP reaches a 1.8x EM
Given the 487m total contributions, am 1.8x EM represents 390m profit
That being said, at this stage we distributed more than what would represent a 1.8x
As such I've built a simple "Net" row checking 1.80x distrib vs. what's already been distributed, if it's positive (ie under 1.8x distributed) then do the 15% 85%
-> No CF drawn in this tier (if we reduce the distributions from the first tiers, it shows LP/GP distrib)
Tier 5:
GP "must" catch-up with 20% of total profit (known: 545m)
Until them -> 100% GP 0% LP
20% of 545 = 110m
GP already got 82m
GP needs 110-82=27m to catch-up
In this tier as it is 100/0 split until we reach 27m LP adds 0 to its account
Tier 6 (50/50 on the remaining CF)
Final ->
Does that make sense?
Any (huge) mistake?
Any metrics to compare LP/GP apart from the cash received? (No contributions so no IRR nor EM)
Thanks a lot in advance!
What kind of firm is asking you to do this?
RE Investment Fund in London (Mix of HNW capital and classic REPE)... Not in a position to refuse opportunities ahah
Guessing you're potentially welltower guy? How did it go?
In Tiers 1/2/3, the distributions should be calculated net of any distributions received up to that period. For Tier 4, you can assume that the 17.61% IRR includes the 15% already received by the Manager. Tier 5 involves giving everything that remains after meeting the equity multiple hurdle to the Manager until they reach a 20% IRR. In Tier 6, you split 80/20 on what's left between the capital contributing partners and the general partner.
Thanks Larry. Doubting some of your points regarding catch-up as it stops mentioning IRR for net profit. Gave my approach in the last comment, it’s been sent, hoping feedback will be positive.
In other words: GP contribution = 0, as such, it’s not possible to think in terms of IRR for him.
More than happy to discuss if I’m wrong!
Some of those tiers directly contradict with one another.
Can you please elaborate?
I think it works but that the EM hurdle becomes "useless" with this cash flow.
As CREnadian mentioned, it's a question of distributions & timings (at least the way I get it):
"In a shorter term deal its probably going to get skipped when you're already over a 14% IRR, but in a longer term hold it will come into play to get the LP to 1.8x."
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